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October, 2002 |
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Sectoral |
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Development Bank’s Demands Now
that the commercial banks, the finance companies and the cooperative
finance companies are already made to follow the prudential banking
norms, Nepal Rastra Bank is reported to be finalising almost similar
directives for the development banks as well. And the development banks
fear that the proposed directives are going to be unjustifiably harsh
for them. “Almost 80% of the
provisions in the proposed directives are the same as those issued for
the commercial banks and finance companies. That is not justifiable for
development banks”, says Sudhir Khatri, President of Development
Credit Bank Ltd. (DCBL), one of the participants in a recent discussion
organised by the central bank on the proposed directives to the
development banks. Though the development
banks have forwarded their suggestions to the proposed norms, they fear
that the central bank is not likely to listen to their pleas because
they are not as strong as the commercial banks to lobby effectively with
the NRB and to make it stoop to their demands. One of the complaints that
the development banks are making is about the restriction NRB is going
to put on the promoters of the development banks on selling their
shares. According to the initial rule as per the Development Bank Act,
the promoters were allowed to sell their shares after two years of the
beginning of operation of the development bank. That was later extended
to three years, and now it is being extended further to five years.
“Such an attempt to block the capital of the promoters is like a
blackmail”, says Khatri. “If there are cases of some promoters of
some development banks misusing the provision, NRB should be able to
take action against them by improving its monitoring capability, but it
cannot penalise all the promoters of all the banks.” Moreover, the forthcoming
rule is also to have a provision that restricts the promoters from
taking loan from the development bank they have promoted. This, coupled
with the provision against the sale of the shares, is too harsh, says
Khatri, and demands that the central bank should permit some way out for
the existing shareholders in the development banks to sell their
promoters’ stake so that they can continue with their normal
businesses. According to Khatri, the
forthcoming rule is also to allow the development banks to accept saving
deposits as was being demanded by them, but the permission is coming
with a catch. It requires the development banks to park 1% of their
total deposits with NRB in an interest-free account. Though the Cash
Reserve Ratio (CRR) for development bank is being reduced to 8% from the
earlier 10% to make it easier for them, it is not going to actually
benefit the development banks because the CRR has been reduced also for
the commercial banks, thus keeping the relative difference in the cost
of funds of the two the same. Though the commercial
banks and development banks were conceived initially as different
categories involving into different types of businesses, thus reserving
some of the businesses for the development banks, that difference is
being reduced, putting the terms now more against the development banks,
complains Khatri. For example, the Development Bank Act allows a
development bank to go into venture capital financing, and as Khatri
says, his bank has already made such financing in some of the cases. But
the forthcoming rule is to restrict such financing only on companies
that are already listed on the stock exchange or are likely to be listed
within the coming year. Similarly, housing was a sector where only the
development bank was allowed as per the Development Bank Act, but now
NRB has permitted commercial banks too to go into this sector, from
where the development banks are likely to be driven out because they can
not compete with commercial banks due to the difference in the cost of
funds. One demand that the
development banks have been repeating all along is the permission to
operate the current account which will help them to reduce the cost of
their fund. Though the central bank is not willing to grant them this
right as this will make the development banks able to create credit
money (a function which by definition should be restricted to commercial
bank only), the development banks say, they need to operate current
account for their clients if not for the general public. “We need it
for two reasons”, says Khatri. “One, if we have the current account
of our client with us, the record of the transaction in that account
helps us to monitor the business of our client and take necessary action
in time if there are early warning signals. Second, if we send our
client to the other commercial banks with our cheque, there are high
chances that our good clients will be snatched away from us by the
commercial banks.” Also regarding the
proposed capital adequacy ratio (CAR), the development banks say the
central bank is not doing justice to them. “We are being asked to
maintain 10% CAR right from the beginning, while the commercial banks
had the comfort of gradually increasing it to the present level, for
example from 9% in the last year. Now they say that the central bank
will consult the CBs before raising it further. But in our case it is
going to be increased right away” “What we are concerned
still more is about the rule that is being proposed for loan loss
provisions”, says Khatri. The central bank is proposing to have a
system of provisioning that is equal to that applied to the commercial
banks. Khatri points out that since provisioning is to be made only in
case of term loans and the commercial banks have only about 20% of their
portfolio as term loans, they are not much affected by the rates for
provisioning. But in case of development banks, almost all of their
portfolio (70-80%) is made of term loans, thus the cost of provisioning
is very high for the development banks. The result of all these
strict arrangements is going to be still higher cost of funds for the
development banks. Moreover, since the areas that were previously
reserved for the development banks are now opened also for the
commercial banks, Khatri moans that the development banks will not be
able to face the competition. “And it is not fair, because this means
the withdrawal of all the facilities that were promised in the beginning
to the promoters of the development bank.” Pointing out the practice
abroad, Khatri notes that in India the Industrial Credit and Investment
Corporation of India Ltd. (ICICI) has its own commercial bank –ICICI
Bank – to cater to the needs of its clients and this makes it able to
compete with the other commercial banks. Against
this background, solution here would be to speed up the introduction of
the Universal Banking Act, which is still being drafted. Till then, the
controversy is likely to linger. With such an Act, any banking
institution may upgrade itself to any other category by fulfilling
certain conditions after which they can enjoy certain specified
privileges. Similarly, they can also be demoted to lower category for
failing to fulfil the requirements for the current category. by
Krishan Prasad Sigdyal An
account of the plight of Nepali entrepreneurs deprived of the
opportunity to participate in the tender process for jobs under
development projects funded by donor agencies.
The
controversy concerning the ABC (Aerial Bundled Cable) supply to the US$
50 million Asian Development Bank (ADB) funded 8th Power Project (OPEC
and HMG fund has also been mobilized for it), presents a fascinating
case to study the developmental issues facing Nepal. The tender document for
various packages for supply of goods and services is to be released for
publication soon (one is already out). The media in the country has
brought to light some of the issues related to it. The packages include
supply on the turnkey basis of some of the sub-stations, and
transmission equipment such as concrete poles, tubular (metallic) poles,
transformer, hardware (pole accessories), Aluminium Conductor Steel
Reinforced (ACSR) conductor, ABC and concentric cable for distribution
from the poles to the consumer’s (consumption measuring) meter-box.
The sub-stations are considered beyond the reach of the Nepalis because
it involves some equipment including high power transformers not
‘known’ to them, although it is sure to be executed almost on a
turn-key basis on sub-contract once it is awarded to the ‘foreign’
principal. The concrete poles were
broken, it is reported, into several packages to allow Nepali industries
to participate in the bid presumably because it is a low value material.
High value and ‘high-yield’ packages have been reserved to
foreigners through a web of financial and mainly technical clauses (so
much so even the internationally acceptable practice of dividing cables
in broad low and high voltage category has been further divided into
specific names) basically to keep the Nepalis out from participation.
The ABC package is out of the reach of the Nepalis on the pretext that
they have no experience in it. The officials refuse even to discuss the
case of ABC package. Even different materials
such as the ACSR Conductor and the Concentric Cable have been lumped
together. It forms a package of about US$ 7 million. God, or the
concerned officials only, (the top officials of NEA including the
managing director have been changed recently) would know why they were
not split into small packages like the concrete or metallic poles. There are about a dozen
cable and conductor industries in Nepal. Many of them have been there
for over two decades fulfilling all kinds of NEA and power project need
of cable and conductors of low and high voltage-be it for Kali-Gandaki
‘A’ or to Chilime. However, the cable and conductor factories were
initially deemed unfit for supplying to Distribution System
Reinforcement Project, one of the six project components of the Rural
Electrification, Distribution and Transmission project (so-called 8th
power project). Finally, when the cable
and conductor factories represented their case vigorously, and the media
took the matter up, the officials began to realize their weaknesses. The
financial criterion was such that no Nepali company, even 10 years
hereafter, would be able to qualify for bidding under the original
condition. For example, under the initial draft, a bidding company
should have supplied the goods continuously for three consecutive years
and three times equal the quantity to be supplied under the bid’s one
year supply package. However, this has been modified now, they say, to
enable the indigenous industries to compete in a joint-venture bid for
the ACSR and Concentric Cable Package. The project officials saw
the need to take it up with the ADB counterparts only after the Nepali
manufacturers made a hue and cry about it. They did not feel the need to
look at the ‘overbearing’ conditions beforehand. It is very common
for all countries to negotiate the terms and conditions with donors to
stimulate the growth of national economy – this does not seem to be
the case with the 8th Power Project despite the fact that far-reaching
decisions were made to effect the US$ 50 million loan. Besides, it will
not help NEA to increase its rate of return (ROR) and self-financing
ratio (SRF), because generally products manufactured in Nepal have been
found to be cost effective in NEA’s own experience. Furthermore, the issue of
Nepali companies to bid jointly for the ABC package (US$ 7 million) is
still in a limbo. The ABC, although a low-voltage insulated cable
falling very well within any low-voltage insulated cable category by any
national or international standard in the world, is deemed outside the
‘capacity’ of Nepali industries because they have no supply record
to NEA, or any other buyer of the particular cable! Nepali insulated
cable manufacturers have been manufacturing more than 200 kinds of
insulated cable in the low-voltage category, and bare conductors in the
high voltage category as well. This brings us to the
centre of the perpetual and self-inflicted vicious circle rendering
Nepal to assume the title of ‘permanently disabled’ least developed
country. The case herefrom would be
more interesting even for those unaware of the Nepali scenario. It would
be hard for development scientists and economists to find a parallel
elsewhere. Nepalis, finally, seem to have lost the aptitude to rule and
regulate their own affair. No surprise then that every other day
someone, more recently the British Government Organized ‘London
Meet’, while pledging support to combat terrorism, points out to
‘address the underlying issues of corruption, discrimination and weak
governance’. Although supposedly more and more exposure has enhanced
individual knowledge and capacity, institutionally it has gone ‘down
to zero’. Despite the rhetoric that
appears in the national dailies on their front-pages everyday in the
form of pious sermons from the so-called leaders, they are practically
‘illiterate’ to even broad development issues, least on the issues
of sectoral development, regional developmental competition or the
policies of the ever-engrossing dominant southern neighbour. Under the circumstances,
the bureaucrats are provided with a golden opportuniry to enrich
themselves at the cost of everything that one can contemplate of. The
bureaucrats inclusive of the technocrats act obediently when it comes to
negotiation with a donor, and accept all condescension imposed as a
stricture passed from heaven! This disposition has done a lot of damage
especially in dealing with the southern neighbour on various bilateral
issues. The educated and the
white-collar technocrats, in the eyes of the commoners, are self-serving
‘demons’ out there ‘to loot the country’ in the name of the poor
people. Let us go back to the 8th
Power Project again. It has been in discussion for the last three or
four years in public forums also. It has been the cause for 2 or 3 steep
rises in NEA tariffs within a short span of time. The ADB finally signed
the agreement with the government to extend the loan only after the
rises were effected. Although there seems to be
some justification for HMG/NEA to accept the loan from ADB because of
the apparent reforms aimed at NEA through other loan package objectives,
one really would do well to give a last glance to the whole gamut once
again looking at the Distribution System Reinforcement Project material
procurement packages’ conditionalities. Should not the procurement
packages be looked as instruments for boosting the ailing national
economy, and even to justifying the increase in tariffs? It is all right for the
ADB to set general conditions suiting all 59-member countries, but is it
not our responsibility to suit it to our condition? Can we, our
bureaucrats and technocrats alike, shirk their responsibility from it?
When the Nepali manufacturers are deliberately kept out (there are
strong reasons to conclude so!), whose interests are they serving? The project officials are
not even interested to listen to the representation of the indigenous
manufacturers in the case of ADB package, and point out to ADB
conditions as if they were Ten Commandments of the Bible. The new top
management of NEA should look into it immediately; if the conditions are
so ‘holy’ and unchangeable, it should have the courage to change the
ABC into Conductor, or cancel the package altogether. The discussion also brings
us to a point wherein the NEA, after completion of the ‘objectives’
of the 8th Power Project, look into the issue or raising funds from
within the country to finance its development projects. The author
strongly feels that it can do so after a careful homework. Are there
conscientious people in the country, or even the ADB, to look into the
issues raised above? The discussion finally
boils down to the need of codification in the laws of the country for an
organized system of public hearing in each sector before such
loans/grants are accepted by the government or else the officials shall
feel free to accept any condition, and to fill in their coffers in the
form of foreign bank accounts at the cost of the national economy,
morale and pride! Is not the message of the ‘London Meet’ loud
enough to do so? (Sigdyal is a senior Journalist turned ‘Consultant’ in the industrial sector) |
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